Shareholders’ agreement: drag-along and tag-along rights, and a couple of tips for minority shareholders
Today we will talk about drag-along and tag-along rights. These rights play a key role in protecting the interests of both majority and minority shareholders. Let's find out what they are and how to use them.
Drag-along rights
Drag-along rights are the right of a majority shareholder to require minority shareholders to sell their shares on the same terms as the majority shareholder if there is an offer to buy the company. For example, if a majority shareholder found a buyer for the entire company and agreed to sell its stake, it could use drag-along rights to force minority shareholders to sell their shares to the same buyer on the same terms.
Why is it necessary?
This mechanism provides the majority shareholder with the ability to sell the entire company at a single price, which can make the sale process much easier and more attractive to potential buyers. Useful when selling the entire company to a strategic investor.
Tag-along rights
Tag-along rights are the right of minority shareholders to join in the sale of their shares on the same terms as the majority shareholder if it sells its stake. For example, if a majority shareholder decides to sell its stake to a buyer, minority shareholders can use tag-along rights to sell their shares to the buyer on the same terms.
Why is it necessary?
This mechanism protects minority shareholders from remaining in the company with a new majority shareholder who may change the management of the company in a way that is not in their interests. Useful to ensure fair sale terms for all shareholders.
Tips for minority shareholders
- Urge the inclusion of tag-along rights in your agreement. This will protect your interests and ensure a level playing field when the company is sold.
- Understand the terms of the drag-along rights and make sure they are fair. You can negotiate a minimum sale price that activates the right and a list of permitted buyers to avoid unfair practices by the majority shareholders.
- Be clear about the terms of the sale. Make sure that all terms, such as price and form of settlement, are the same for all shareholders when applying drag-along and tag-along rights.
- Attend shareholder meetings and keep a close eye on the company's activities. This will help you to keep abreast of any important changes and respond to them in a timely manner.
Authors: Irina Kuheika
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